Will Becoming a Liquidity Provider Surely Guarantee a Broker's Strategic Success?

Many Forex Brokers act as Liquidity Providers (LPs) themselves by offering their own bid and ask rates to their clients. According to incomplete statistics, companies in global FX markets that provide both liquidity and brokerage services include:

The advertising words and phrases those LP brokers use such as "competitive price and tight spreads guaranteed by direct access to Tier-1 liquidity" seem to be persuasive in the context of sales. This continues to encourage non-LP brokers to try hard to become a liquidity provider. So will becoming an LP surely guarantee a broker's strategic success?

Judging from the success of Invast Global, the answer could turn out to be yes. Invast Global ventured into the Prime Brokerage sector under the name "PurePrime" in Australia in April 2016. When the curtain fell on 2016, the prominent electronic trading company had cemented a 142 per cent YoY increase in total active client accounts, along with a 113 per cent increase in total turnover YoY.

However, if we take a look back on the history of global forex giant Gain Capital, we may find an opposite possibility. Gain initially launched GTX as a venue for trading in FX and precious metals for institutional investors in 2010, but made a surprise move by selling the GTX ECN business to Deutsche Boerse AG 8 years later. According to Glenn Stevens, Chief Executive Officer of Gain Capital, the company took that strategic step to focus their attention and resources on their core retail business.

Gain's retail business represents more than 90% of the Company's total revenue. In 2008 and 2009 (before the launch of GTX), the FX market leader's five-year revenue growth is respectively 849% and 757%, while in 2011 (after GTX), its five-year revenue growth dropped to 169%. It seems that to a broker like Gain which is really in its element at the Retail FX market, becoming an LP would, on the contrary, hinder the company's growth.

So that is to say, becoming an LP is not a 100% effective strategy for a broker to achieve strategic success. Brokers should go for this strategy on the basis of rigorous consideration.

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